Welcome. The last couple of modules, we've been discussing assets, but now, we're going to switch to liabilities. Before we do that, I want to do a quick review though. Well, we've been talking about assets. We've been talking about items of value that the company controls, things they have that they can use to run their business. The question is, how are these items related to the liabilities? Well, you may recall from an earlier video this balance sheet equation. What it told us is that assets equal liabilities, plus owner's equity. We're going to discuss owner's equity in a later video, but I did want to remind you of this basic relationship, and remember the way that we talked about it. We said, if assets are what you have, then liabilities and owner's equity tell you where things came from. So, in the case of a liability, I got my asset through borrowing value from some other entity. Versus owner's equity says that my owners put that item into the company either directly or by allowing me to keep the value that the company had created. Now, let's move onto our focus of this module, which is liabilities. Before we really get going on that, I want to do another review though. Remember the accounting definition of liabilities that I showed you earlier? Well, you might not. So, let me remind you. A liability first-off, has to have probable future economic sacrifice arising from a present obligation. Now, again, I want to stress that word probable. It's not saying that for certain, we have a future economic sacrifice, but rather, an expectation, there's going to be a future economic sacrifice. It has to be some sacrifice that we're already obligated to now. The second part of this criteria is, it's a result of a past transaction or event. Now remember, we have to meet both of these criteria in order for it to be a liability. A probable future economic sacrifice, and a result of a past transaction or event. Both of those are going to become important as we move forward looking at liabilities. Now, the good news about liabilities, you've seen quite a few of them before. So, let me just give you a quick summary of some of those. Several times, we've seen liabilities that we've incurred in the course of getting an asset. For example, remember when we purchased inventory. Let's say, we purchased inventory of $20,000, how did we pay for that inventory? Well, we didn't give cash up for it yet, we promised somebody that we would give them cash in the future. So, as you can see from this entry, our asset inventory went up. Where did it come from? It came from a liability called accounts payable. That's indicating to people that we have some probable future economic sacrifice that we're going to have to make. Also, think back to our balance sheet equation. Here, we see an asset going up, and a liability going up by an equal amount. So, our assets still equal our liabilities plus owner's equity. Now, what happens when we actually pay that off? Well, the accounts payable goes away, so we debit it, and our cash goes down. Again, if you think about that balance sheet equation, what you're going to notice here is that assets go down and the liabilities go down. So, our balance sheet stays balanced. Let's do another one you've seen before. Remember back when we had employees helping to make items? Let's say for example, these employees were making chairs. Well, the employee works and the value that they've created during that period creates inventory that we're going to sell in the future. So, we have an asset, inventory, and we have a liability, wages payable, meaning that we owe our employees or somebody a wage in the future. What happens when we actually pay the employees? Well, just like in the last transaction, we see an asset go down, cash, and we see a liability go down, wages payable. Now, both of these examples are liabilities because we're getting an asset. We also can have liabilities related to an expense. Let's think now about that same company that makes chairs, but instead, you're an employee who works out on the sales floor. People come in and you're either able to sell a chair or not. You get paid an hourly wage and when the months over, you're going to be paid whether there were any sales or not. Well, in that case, at the end of the month, if they haven't given you the cash yet, we'd have an entry like this. A liability of 5,000 for wages payable to indicate to the outside world that they still owe you, and then wages expense to indicate that that value has been used up during this period. Now, right about now, you might be saying, ''Wait a minute, what about that balance sheet equation?'' Here, I see liabilities go up, but I don't see any impact on assets. Well, remember, the other side of the equation is, assets equals liabilities, plus owner's equity. So, what happens here is the expense decreases the current period net income. A lower current period's net income, means that we have a lower owner's equity through retained earnings. So, what we're seeing is, as our liabilities go up, our owner's equity goes down. That side of the balance sheet stays the same. So, assets doesn't need to change. Now, what happens when we fulfill this obligation? Well, here we do see assets come into play, cash the asset goes away, so that side goes down. Then we see wages payable, the liability go away also. So, the liability and owner's equity side goes down as well, and our balance sheet equation stays balanced. These are all simple liabilities that we've bumped into as we've worked our way through things during this course. In the next couple of videos, I'm going to introduce you to a couple of other liabilities which really are no more complicated, but you haven't seen before.
